Unclaimed property could end up being a windfall

PIERRE – In the next few years, South Dakota’s state treasury is expected to start receiving a large annual windfall of cash that belongs to people who don’t live here.

If experience holds true, much of this money, known as unclaimed property, probably won’t ever be claimed. Knowing the odds, the Legislature and the governor reached final agreement in the past week to take a gamble and start spending a large chunk of it.

That begins less than two years from now. A stream of the money will be automatically channeled into the new Building South Dakota fund. It will pay for incentives for economic and community development.

The timetable calls for 25 percent, or about $7 million, of the unclaimed property money to be transferred into the fund during the 2015 budget year.

That will be followed by 50 percent, or about $15 million, in the 2016 budget year. The 50 percent share will continue annually after that.

“It doesn’t cost us anything. It doesn’t cost the banks anything. It’s one of those things that comes along with us being a welcoming state for banking,” said Republican Sen. Bruce Rampelberg, a retired banker from Rapid City.

He said Republican Sen. Corey Brown of Gettysburg brought the idea forward and made it the centerpiece of a much broader plan.

Brown folded together other legislator’s proposals, ranging from assistance on agricultural processing roads to housing shortages and families new to South Dakota who don’t speak English. He brought Democratic leaders into the planning meetings and discussions.

Republican Rep. Scott Munsterman of Brookings introduced an approach for projects to receive some local sales-tax relief. He convinced the Republican and Democratic leaders of the House and the Senate to sign on as co-sponsors.

Munsterman’s legislation was eventually set aside as Brown’s own bill became the hub. “The compromise happened the second or third week of the session (in January). After that it was collaboration,” he said.

Brown shared his idea with Munsterman during the second week of session about tapping the unclaimed property revenue. “I almost fell out of my chair,” Munsterman said.

The incentives money that will be paid from the fund will be spread across five purposes.

Workforce education will get a 30 percent share; infrastructure grants 25 percent; housing development 25 percent; local economic development partnerships 15 percent; and the final 5 percent for grants and loans to business projects costing less than $20 million.

There wasn’t much argument over the splits. “Everybody was focused on the model,” Munsterman said.

One reason, he said, was that lawmakers know they can “turn the dials” in the years to steer money toward specific needs.

“I am ecstatic about it. I really am,” Munsterman said.

Just a decade ago, South Dakota netted little from unclaimed property. Depending on the year, it might be $1 million or less.

That is changing fast. Unclaimed property revenue collected by the state treasury rose past $10 million in each of 2011 and 2012. For 2014 it is forecast to be about $30 million and remain at that level going forward.

This surge was fueled when several major banking corporations, such as Citi and Wells Fargo, consolidated their charters in South Dakota for tax reasons. That means money left behind in accounts throughout the nation will become unclaimed property here.

Accelerating the growth is another change. The period for property to be declared as abandoned was reduced from five years to three years. Banks, utilities and other institutions will need to turn over the unclaimed property two years sooner.

To get the Building South Dakota programs started, the Legislature approved $7 million of cash from the state treasury. The unclaimed property stream becomes the funding source in year two.

Munsterman placed second in the five-way primary for the Republican governor nomination in 2010. He said he learned walking the main streets of 200 communities that the top concern in most instances was school enrollment going down.

Next was a general lack of knowledge about how to try to attract businesses. When Munsterman returned to the Legislature this year he found a new lawmaker, Republican Rep. Dick Werner of Huron, was interested too in beefing-up help to those communities for training and funding.

Werner’s legislation was combined with Munsterman’s. Then Munsterman’s concept and Werner’s proposals were put into the Brown bill.

Similar things happened with a plan from two Huron lawmakers, Republican Sen. Jim White and Democratic Rep. Peggy Gibson, to get more state aid to school districts needing to offer training in English as a second language.

Likewise for a local infrastructure fund that Republican Sen. Shantel Krebs of Renner hoped to create.

Meanwhile Gov. Dennis Daugaard needed a replacement for his defeated incentives proposal to provide grants to large business projects.

Approved by most of the Republicans in the Legislature during the 2011 session, Democratic Party state chairman Ben Nesselhuf led the petition drive to refer it to a statewide vote.

Democrats rejected the plan because it called for siphoning 22 percent of the contractor’s excise tax revenue, which would be more than $15 million in most years.

They wanted to pursue other sources of funding but found their involvement and input blocked.

Voters rejected the Daugaard program in the November 2012 general election. The construction-tax refund program it was scheduled to replace was due to expire less than two months later on Dec. 31.

Daugaard didn’t want to take the lead on proposing another new incentives program. He had also been beaten in election on his K-12 education measure, and he decided he wouldn’t submit any pieces of that to the Legislature again either.

That left legislators to fill the gap on the economic development incentives. Brown began by contacting people such as House Democratic leader Bernie Hunhoff of Yankton, Senate Democratic leader Jason Frerichs of Wilmot, a variety of his fellow Republicans and Julie Johnson, an economic development leader in Aberdeen.

Brown’s idea was to use the unclaimed property revenue as part of a broader approach.

He wasn’t comfortable doing more than one-time projects with the money because people or their children could still make their claims for what they were due, and because the amount could vary by millions every year.

As the 2013 legislative session opened he saw smaller, targeted proposals for economic and community development crop up from other legislators. Because they could be adjusted year to year, they were a good fit for a funding source that was somewhat risky and would ebb and flow.

“My new favorite phrase this session is repetitive one-time dollars,” Brown said. “We funded this with dollars that didn’t exist before this year. It wasn’t any action of ours. It was the banks.”

The Democratic leaders sat side by side with Republicans in unveiling the plan a week ago and in conducting several hearings in the days since.

“I feel pretty good about it,” Hunhoff said.

“We’re deeply involved in the bill that you have,” Frerichs said.

The other source for the Building South Dakota fund will be revenues from the contractor’s excise tax on business projects costing at least $20 million.

They in turn will be eligible for tax refunds, officially known as reinvestment payments, up to the amount of the sales and use taxes paid on the project. To qualify they will have to prove they wouldn't have otherwise come to South Dakota.

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